Global Economics

Qualcomm's Paul Jacobs Sounds Off

As the chipmaker faces challenges to its 3G intellectual-property rights from Nokia and the European Commission, CEO Jacobs looks to the next-gen technology

U.S. chipmaker Qualcomm (QCOM) built its highly profitable business on developing and licensing intellectual property for mobile communications, especially the CDMA standard, which it invented. Today, Qualcomm's patents are an integral part of all third-generation (3G) mobile networks—including the type that succeeded the European-bred GSM standard.

But Qualcomm is taking a lot of flak lately. Rivals say the "supernormal" profits it earns from royalties on 3G amount to a kind of tax on the entire mobile industry, which translates into higher prices for consumers. As a result, the company is deadlocked in its royalty negotiations with Nokia (NOK), the world's largest phone maker with 40% of the market. A previous contract between the companies expired on Apr. 9.

The Finnish phone maker claims Qualcomm is demanding too high a price for a new contract, and the companies have been forced to resort to arbitration. The outcome could add or subtract hundreds of millions of dollars in profits for either company.

Qualcomm also is under investigation by the European Commission's Directorate General for Competition for allegedly overcharging for its intellectual property and using abusive sales techniques to prolong its position in mobile-phone technology. If antitrust officials find Qualcomm's behavior has breached European competition rules, the commission could impose fines as high as 10% of the company's annual revenues.

Another branch of the commission is threatening to mandate a technology for mobile TV that could potentially block Qualcomm out of the market. And the world's largest mobile operators recently indicated they are backing a next-generation mobile standard that competes with Qualcomm-developed Ultra Mobile Broadband (UMB), the planned successor to its CDMA family of products.

While in Barcelona for the Mobile World Congress, Qualcomm Chief Executive Paul Jacobs addressed these issues during an interview with BusinessWeek's Jennifer L. Schenker.

Can you give us an update on where things stand in your contractual battle with Nokia?

It hasn't moved very much. We are in discussions in a Delaware court to consolidate some of the cases, to bring some of the contractual issues and some broader issues together. I think it would be good to consolidate everything in one forum. On the other hand, we are very happy with the arbitration panel that was chosen. It is comprised of very senior and sophisticated people, so if it turns out we go to arbitration that is O.K.

How long could this drag out?

Unfortunately it could potentially go on for a while. We have taken the numbers out so that financial analysts can value us independently of it.

Where do things stand with the European Commission's competition directorate?

We are still in discussions. We are waiting for them to do their investigation, and we are cooperating as fully as we can.

In a recent interview with BusinessWeek, European Commissioner Viviane Reding said she is convinced DVB-H is the right standard for mobile TV in Europe and that she will mandate its use if necessary. Does that mean MediaFlo, Qualcomm's technology, will be shut out of Europe?

We hope that does not happen. We would like to see bands designated for certain types of services that will help deployment. As far as mandating technology, we would like to see that left to the market.

There has been a lot of discussion at the Mobile World Congress about Long Term Evolution, or LTE, a proposed fourth-generation mobile standard. Some of the world's biggest operators, including Verizon (VZ), Vodafone (VOD), and China Mobile (CHL) are backing it. But no one seems to be talking about UMB, the standard Qualcomm is promoting for next-generation networks. Where does that leave Qualcomm?

We have an interesting technology road map. We are developing new technology to more consistently handle data rates throughout the cell to give significant improvement of capacity. Those technologies will make their way to LTE standards. We are really supporting both paths, and I think we are consistent over time. We are going to invest to be the leader in wireless technology. In the end we are a wireless innovator, we want to continue to innovate on both paths.

What is Qualcomm emphasizing here at the show?

We want to be a lead partner in bringing some of the Internet players into the mobile world. We are working with Google (GOOG) on Android, we work with Skype (EBAY), and we do lots of stuff with Microsoft (MSFT). We are also working with HP (HPQ), Lenovo (LNVGF), and Panasonic (MC) on integrating EV-DO and HSDPA modules into laptops so that people can consider the world as their hotspot.